* PepsiCo sells China bottling assets to Tingyi-Asahi
* Pepsi gets 5 pct of Tingyi-Asahi, option for up to 20pct
* Gives Pepsi products access to Tingyi distribution
* PepsiCo shares close down 1.3 pct
By Rachel Lee and Martinne Geller
HONG KONG/NEW YORK, Nov 4 PepsiCo Inc
agreed to sell its interest in 24 soft drink bottlers in China
to Hong Kong-listed Tingyi Holdings Corp , an
acknowledgment that its strategy in China was not working.
PepsiCo will initially receive only 5 percent of
Tingyi-Asahi Beverages (TAB), Tingyi's joint venture with
Japan's Asahi Group Holdings Ltd , a stake the
companies valued at about $55 million. PepsiCo has the option
of increasing its stake to 20 percent by 2015, when China is
projected to become the world's largest market for bottled
PepsiCo's bottling business in China, which has a book
value of $600 million, has lost money for the past two years
amid soaring raw material costs and intense competition from
Coca-Cola Co , whose share of the Chinese market is more
than triple that of Pepsi.
Coca-Cola's sales volume rose 11 percent in China in the
most recent quarter, fueled by its Minute Maid Pulpy, a drink
Coke developed specifically for China that recently crossed the
$1 billion sales threshold.
"Obviously, Coke is winning," said Michael Yoshikami, CEO
of YCMNET Advisors. "When you're in China, Coke is very, very
He said Pepsi likely realized the boost its brands would
get from linking up with Tingyi was a better way forward than
"slugging it out with Coke."
"Is this a sign that Pepsi is retreating; that they can't
contend with Coke one-on-one in a face-off to take over the
biggest market in the world? Well, it sure looks that way,"
said Bevmark Consulting CEO Tom Pirko.
Analysts said the deal was good for Tingyi, since it lets
the maker of Master Kong instant noodles and bottled tea expand
its beverage offerings without hurting its balance sheet.
They also said it was good for PepsiCo, since it broadens
its distribution, allows it to unload those loss-making
operations and gives it a stake in a company poised for faster
growth than Pepsi alone.
A combined Pepsi and Tingyi would control about 20 percent
of the Chinese soft drink market, according to data from
Euromonitor International, overtaking Coke, which has market
share of nearly 17 percent. PepsiCo is currently fourth with a
5.5 percent stake.
"But (it) could also be viewed as a capitulation, as
PepsiCo is surrendering some of the upside in one of its key
growth markets and admitting the need for a partner," Levy
She also noted the similar arrangement PepsiCo has in Japan
with Suntory Holdings Ltdhas not resulted in
significant market share in that market.
China's massive billion-plus population has long been
enticing to foreign brands, keeping most of the focus on inward
investment from overseas.
The Pepsi/Tingyi tie-up marks a rare case in the consumer
sector of a Chinese company acquiring a foreign stake within
its own borders and not the other way around, as brands seek to
seize market share and tap China's growing middle class,
widening tastes and purchasing power.
Lois Olson, a marketing professor at San Diego State
University who specializes in China, said the deal could be
seen as evidence of the growing power of Chinese companies.
"There is an increasing power, leverage and sheer might in
Chinese companies. They're getting a lot better at what they
do," she said.
Still, she added the move probably had more to do with Coke
"There aren't a lot of duopolies in the world and this is a
huge, powerful duopoly. Coke really does dominate there," she
said, noting the huge success in China of Yum Brands Inc , which runs the KFC and Pizza Hut chains and used to be
part of PepsiCo, has not translated into success for PepsiCo.
Attempts by overseas businesses to enter China have not
always been successful. Coca-Cola was blocked by regulators in
its $2.4 billion bid in 2009 for Huiyuan Juice, which raised
concerns among investors that such deals were effectively off
Nestle, though, is currently eyeing a possible $2.6 billion
deal to buy candy maker Hsu Fu Chi International Ltd .
And Diageo, the world's largest spirits group, took a major
step forward in June toward taking control of Sichuan
Shuijingfang Co Ltd , China's fourth-largest white
Under the alliance, TAB would work with PepsiCo's current
bottlers to manufacture and distribute PepsiCo's drinks, while
PepsiCo would keep responsibility for branding and marketing.
TAB would begin co-branding its juice products under the
Tropicana brand name.
The deal is subject to review and approval under China's
Anti-Monopoly Law and approval of Tingyi shareholders.
A PepsiCo spokesman said the company would begin seeking
those approvals immediately and said it would be inappropriate
to speculate on how long the process would take.
Tingyi, which owns the Master Kong brand of instant
noodles, drinks and snacks, has a market capitalization of $15
billion after a roughly 20-fold increase in its share price in
the past 10 years on rising consumer demand in China.
PepsiCo said last year it would invest $2.5 billion in its
food-and-beverage businesses in China over the next three
years. It had said it planned to open 10-12 new plants in China
to manufacture soft drinks, noncarbonated beverages and snacks
and would install additional production lines at existing
UBS advised PepsiCo on the deal, while J.P. Morgan advised
PepsiCo shares closed down 1.3 percent at $61.99 on the New
York Stock Exchange on Friday.